What is GRR? The Unspoken Truth

What is GRR? GRR stands for ‘Guaranteed Rental Returns. This is a scheme that a lot of property developers offer investors in Malaysia to entice them to purchase units off their latest property launches.

The developers sell the units under this scheme with the promise of ‘guaranteeing’ rental returns based off a percentage of the purchase price. (This can range anything from 2% – 7% per annum in KL) In a sense, they tell you that they will be able to manage your property for you and provide you with a tenant that will pay this fixed percentage for a certain number of years.

Just how exactly do they do this?

More often than not, the developer has already priced these GRR costs into the original cost of the unit when sold. Just like those low down payment, free SPA and cashback deals that tend to capture your attention, all these special offers have already been priced into the cost of the property.

I think we might see a rise in GRR offers now in 2020 and beyond considering the current property overhang that we are facing in the country.

Ultimately, it doesn’t really matter how they do it though. It only matters whether it really makes the investment property a good one for you or not. You just need to be careful that you’re not sucked in to a deal that isn’t much of a deal at all.

The key here, is to look at the numbers.

The numbers don’t lie.

They never do.

Compare the returns with your bank loan repayments. See how they match up.

Make sure to include all associated costs; your maintenance fees, sinking fund and MLTA or whatever else you may be paying each month as part of your property investment.

Putting the GRR amount next to your monthly commitment should show that you will at least make a profit or something very close to it, for the deal to be worthwhile.

For example, let’s say that you plan to purchase a property worth RM 600,000. The developers are offering you a 6% GRR on the property for 3 years. This means that each year, the developers will guarantee you RM 36,000 a year or RM 3,000 per month.

You’ll now need to compare this to your expenses. The unit you’re interested in is 1100 sqft and there’s a 0.20 sen maintenance fee and 0.10 sen sinking fund per sqft per month. This comes to RM 330.

Add in your MLTA at RM 300 per month and your loan repayment of RM 2,500 per month, and your monthly commitment comes to a grand total of RM 3,130.

Comparing the two figures indicates that you only need to fork out an excess RM 130 each month. That doesn’t seem like too bad a deal at all. Especially if you’re hoping to reap the rewards of some sweet capital gains in 10 years.

In this example, that 6% GRR is looking mighty fine! The numbers are good and the GRR deal isn’t just a lure to hook unsuspecting investors! Take my money, you say?

Well… maybe not just yet. Besides the numbers, there was one other thing that was mentioned. The GRR term. GRR isn’t offered indefinitely and in the example above, it was only offered for 3 years. This is another thing to keep an eye out for.

Be sure to do your homework on the area which you are buying your property is located. Sometimes the GRR is an over inflated price that might not be able to be matched once the term ends.

RM 3,000 a month could be extremely farfetched for a 1100 sqft unit in Klang Valley, so you would need to consider if you feel you can find a tenant who will pay that much when the term ends, unless you have some ideas on how to develop other creative rental strategies.

You’ll also have to contest with all the owners under the GRR scheme who will also be rushing to look for tenants when the tenure ends. If there are 500 other units here who were on the same scheme, you’ll need a plan to secure a tenant quick or find yourself deep in a rental price war with all the other owners like yourself.

Another thing that you should consider is the possibility of not receiving your GRR.

Despite being told that your Guaranteed Rental Returns are Guaranteed, what can you do if the developer doesn’t pay your dues?

You’ll actually have to take your developer to court, which can be quite expensive.

As GRR is not covered under the Housing Development Act (HDA), there isn’t a direct provision under the HDA whereby the developer breaks the contract due to non-payment.

It is covered however under the Tribunal for Consumer Claims as part of the Consumer Protection Act 1999. This Act will protect you up to claims of RM25,000, which should be more than enough for you to claim out on rental lost from whenever the developer stops paying you.

You will need to think about it carefully though because even if you are able to reclaim back lost payments from GRR, you’re going to have to deal with a unit that might face some huge difficulties in securing tenants.

If the developer was unable to secure them, just imagine how hard it would be to secure them on your own and at the same time be fighting with all the other owners in the same boat as you!

It’s a well-known truth, that if something looks too good to be true, it often is. There are however, some hidden gems that are out there but they are few and far between.

Personally, I have invested in a GRR project myself at Ion D’elemen in Genting Highlands.

[Find Out Why Genting Highlands Was My Top Area For Investment in 2018] 

I am currently still under GRR and when The Coronoavirus Pandemic hit I was extremely afraid as I received a letter that they were going to suspend the GRR under the ‘Force Majeure’ clause of the contract.

Force Majeure basically means ‘unforeseeable circumstances that prevent someone from fulfilling a contract’.

You’ll notice that this clause is in almost any contract that you’ve ever signed.

The other owners were very quick to band together to see what they could do to get this reinstated and I am very pleased to say that the developer actually came up with a very reasonable compromise.

The developer said that they would resume the GRR in the following year and extend the period for the entire time that it was suspended during which they were unable to rent out rooms with a small penalty for the first month that payment is resumed where owners would only receive half of the original GRR at 3.5% instead of 7%.

I would say that contractually they do not have to do this but the developer respected the owners enough to show that it was willing to take care of our interests and protect us despite of the fact that they were contractually not bound to do anything for us.

I’m sure it could be due to other factors as well such as protecting their reputation but it doesn’t change the fact that they did the right thing by investors and protected our interests.

The developer is also currently working on another project just beside Ion D’elemen where they are offering GRR as well. You can find out more about it in my post on their Ion Majestic project.

Things may not always turn out in your favour however as there have been many cases where developers have not done what happened for me above.

Just remember to always remember to do your research and consider every aspect of your purchase before making your final decision. GRR is just one of many important aspects that you should consider when buying a new investment property.